MARKETBEAT OFFICE SNAPSHOT

SAN FRANCISCO, CA A Cushman & Wakefield Research Publication Q1 2014

ECONOMIC OVERVIEW Bush Street is in contract with a Chinese buyer. The largest deal of The strong job market continues the quarter was Invesco’s purchase of for $765 psf to be a main driver of leasing activity. Total at a sub-4% cap rate. With mounting pressure to place money here, employment expanded by 27,000 new jobs in potential buyers are lowering their size threshold and are willing to the trailing 12-month period through March invest in smaller deals. 2014 according to Moody’s Analytics. This 2.6% OUTLOOK annual increase is well ahead of the state’s 1.9% and the U.S.’s 1.7% A total of 1.2 msf of new space was added to the inventory with the rates. The professional and business services sector led the growth on completion of Foundry Square III along with three renovation an absolute basis with nearly 8,600 new jobs. projects. By 2015, we are expecting another 2.4 msf of new LEASE SIZE INCREASES construction and renovated space; however, nearly 40% of this space San Francisco’s office market got off to a strong start in the first has been pre-leased. Given the forecasted annual employment growth quarter with a record setting pace of leasing activity just as the first of over 2% through 2015, increased leasing velocity, and expansions wave of new construction was completed. Leasing activity totaled 1.9 within the technology sector, we are in a solid position to absorb this million square feet (msf), the third-highest level for a first quarter in new space. 10 years. Tech companies continued to dominate leasing activity CITYWIDE STATS ON THE GO during the quarter with significant new leases by Twitter, Dropbox, LinkedIn, Trulia and Practice Fusion, as well as Google’s 372,000-sf Q1 2013 Q1 2014 Y-O-Y 12 MONTH CHANGE FORECAST renewal at Hills Plaza (renewals are not counted in overall leasing Overall Vacancy 9.5% 9.8% 0.3pp activity statistics). Twelve leases (both new and renewal) were larger than 50,000 sf with six of those leases topping out at more than Direct Asking Rents (psf/yr) $51.92 $56.13 8.1% 100,000 sf. With such large leases during the first quarter, the average YTD Leasing Activity (sf) 1,466,042 1,926,171 31.4% new lease size increased by more than 15,000 sf, 90% higher than where it stood one year ago at 7,900 sf and 70% higher than the CITYWIDE DIRECT RENTAL VS. VACANCY RATES annual average over the past three years of 8,700 sf. $60.00 15.0% While the new construction coming online resulted in a slight uptick $50.00 in the class A CBD vacancy rate, to 9.1% from 8.9% last quarter, the $40.00 10.0% majority of the tenants signing new leases had not moved in by the $30.00 end of the quarter, and we will see the absorption of that space psf/yr $20.00 5.0% throughout 2014. Additionally, class A direct rents in the CBD $10.00 continued their upward momentum, increasing by 3.8% to $60.20 per $0.00 0.0% square foot (psf), the highest average asking rent in nearly 14 years. 2010 2011 2012 2013 1Q14 Overall Citywide asking rents increased to $55.22 psf while the vacancy rate remained unchanged at 9.8%. Despite concerns about DIRECT GROSS RENTAL RATE DIRECT VACANCY RATE some companies leasing ahead of current needs and quickly putting sublease space on the market, the sublease vacancy rate still remains CITYWIDE LEASING ACTIVITY VS. ABSORPTION below 1%. 2.5 FOREIGN CAPITAL ATTRACTED TO THE MARKET 2.0 The investment market remains highly competitive as the strong 1.5 1.0 leasing activity is attracting both well capitalized foreign buyers and msf 0.5 1.5 0.1 1.8 0.1 1.9 0.2 2.0 1.9 1.2 0.0 core investors. With San Francisco in the top three global markets to 0.0 invest in according to AFIRE’s latest survey, there has been an influx of -0.5 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Asian and European buyers. Norges Bank, the Norwegian sovereign wealth fund, acquired a 48% interest in . Asian buyers picked up 1550 Bryant Street and 211 Sutter Street, and 225 LEASING ACTIVITY OVERALL ABSORPTION

Cushman & Wakefield of California, Inc. – Lic. #00616335 For more information, contact: The market terms and definitions in this report are based on NAIOP standards. No 1 warranty or representation, express or implied, is made to the accuracy or 425 Market Street, Suite 2300 Andrea Arata, Research Manager completeness of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without San Francisco, CA 94105 415 773 3514 notice, and to any special listing conditions imposed by our principals. www.cushmanwakefield.com/knowledge [email protected] © 2014 Cushman & Wakefield, Inc. All rights reserved.

SAN FRANCISCO, CA SUBMARKET INVENTORY OVERALL DIRECT YTD LEASING UNDER YTD YTD DIRECT YTD OVERALL OVERALL WTD. AVG DIRECT WTD. AVG. VACANCY VACANCY ACTIVITY CONSTRUCTION CONSTRUCTION NET ABSORPTION NET ABSORPTION ALL CLASSES GROSS CLASS A GROSS RATE RATE COMPLETIONS RENTAL RATE* RENTAL RATE* North Financial 25,853,335 9.1% 8.4% 404,725 0 0 46,982 45,423 $57.47 $59.89 South Financial 23,995,491 9.5% 8.4% 412,935 2,999,156 275,902 825,862 755,982 $57.62 $60.56

CBD 49,848,826 9.3% 8.4% 817,660 2,999,156 275,902 872,844 801,405 $57.55 $60.20 Jackson Square 1,490,806 8.3% 7.3% 37,583 0 0 13,567 13,567 $45.85 $48.25 North Waterfront 3,225,783 11.1% 10.6% 17,846 0 0 (66,152) (73,830) $45.51 $48.89 East SOMA 4,246,785 5.2% 4.8% 447,321 293,000 0 42,256 47,891 $57.94 $60.17 West SOMA 838,172 2.9% 2.9% 3,225 0 0 0 3,225 $36.60 N/A The Presidio 1,030,627 6.2% 6.2% 15,148 0 0 (1,431) (1,431) $60.00 $60.00 Union Square 3,173,989 3.7% 3.3% 13,213 0 0 13,131 4,781 $48.97 $44.21 Van Ness Corridor 785,956 7.0% 7.0% 1,351 0 0 (4,820) (4,820) $42.00 $42.00 Showplace Square/ 3,111,042 19.1% 14.6% 189,375 0 0 68,886 540 $49.24 $50.00 Potrero Hill Mission Bay 1,056,735 25.5% 25.5% 0 0 0 74,285 74,285 $59.12 $59.12 Yerba Buena 3,108,383 11.7% 11.6% 70,243 0 0 229,717 228,334 $52.08 $51.50 Civic Center/Mid-Market 3,159,668 18.1% 18.1% 313,206 0 0 120,881 120,881 $45.92 $45.92

NON-CBD 25,227,946 11.0% 10.1% 1,108,511 293,000 0 490,320 413,423 $49.50 $51.42

TOTALS 75,076,772 9.8% 9.0% 1,926,171 3,292,156 275,902 1,363,164 1,214,828 $55.22 $58.64

* RENTAL RATES REFLECT ASKING $PSF/YEAR

MARKET HIGHLIGHTS SIGNIFICANT Q1 2014 LEASE TRANSACTIONS SUBMARKET TENANT BUILDING CLASS SQUARE FEET 333 & 345 Brannan Street / 185 Berry Street - Wharfside East SOMA Dropbox A 403,664 Hills Plaza - 345 Spear Street(1) South Financial Google A 372,167 One Tenth Street Civic Center/Mid-Market Twitter B 313,206 650 Townsend Street Showplace Square/Potrero Hill Practice Fusion A 101,825 71 Stevenson Street(1) South Financial Bare Escentuals A 94,306

SIGNIFICANT Q1 2014 SALE TRANSACTIONS SUBMARKET BUYER PURCHASE PRICE / $PSF SQUARE FEET 101 Second Street South Financial Invesco $297,000,000 / $765 388,370 1550 Bryant Street Showplace Square/Potrero Hill Downtown Properties $85,000,000 / $460 184,706

SIGNIFICANT Q1 2014 CONSTRUCTION SUBMARKET MAJOR TENANT COMPLETION DATE BUILDING SQUARE FEET COMPLETIONS (% LEASED) 505 Howard Street - Foundry Square III South Financial Neustar & LinkedIn Q1 2014 275,902 (49%)

SIGNIFICANT PROJECTS UNDER CONSTRUCTION SUBMARKET MAJOR TENANT COMPLETION DATE BUILDING SQUARE FEET (% LEASED) 535 South Financial Trulia Q4 2014 307,000 (26%) 333 Brannan Street East SOMA Dropbox Q3 2015 176,500 (100%) South Financial Salesforce.com Q1 2015 444,000 (100%) South Financial NA Q3 2015 452,377 Street(2) South Financial N/A Q4 2015 684,000 415 Mission Street - Transbay Tower South Financial N/A Q2 2016 1,400,000

(1) RENEWAL - NOT INCLUDED IN LEASING ACTIVITY STATISTICS (2) INCLUDES 267,000 SF OF MULTIFAMILY

Cushman & Wakefield of California, Inc. – Lic. #00616335 For more information, contact: The market terms and definitions in this report are based on NAIOP standards. No 2 warranty or representation, express or implied, is made to the accuracy or completeness of 425 Market Street, Suite 2300 Andrea Arata, Research Manager the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice, and to any special listing San Francisco, CA 94105 415 773 3514 conditions imposed by our principals. www.cushmanwakefield.com/knowledge [email protected] © 2014 Cushman & Wakefield, Inc. All rights reserved.